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Abnormal Return

Definition

In finance, an abnormal return is the difference between the actual return of a security and the expected return. Abnormal returns are sometimes triggered by "events." Events can include mergers, dividend announcements, company earning announcements, interest rate increases, lawsuits, etc. all of which can contribute to an abnormal return. Events in finance can typically be classified as information or occurrences that have not already been priced by the market.

What is an 'Abnormal Return'

An abnormal return is a term used to describe the returns generated by a given security or portfolio over a period of time that is different from the expected rate of return. The expected rate of return is the estimated return based on an asset pricing model, using a long run historical average or multiple valuation.

Explaining 'Abnormal Return'

Abnormal returns are important in determining a security's or portfolio's risk-adjusted performance when compared to the overall market or a benchmark index. Abnormal returns could help to determine a portfolio manager's skill on a risk-adjusted basis and whether investors were adequately compensated for the amount of risk assumed.

Calculating Abnormal Return Using CAPM

The capital asset pricing model (CAPM) is a framework used to calculate a security's or portfolio's expected return based on the risk-free rate of return, beta and the expected market return. After a security's or portfolio's expected return is calculated, the abnormal return could be calculated by subtracting the expected return from the realized return. The abnormal return may be positive or negative, depending on the performance of the security or portfolio over the specified period.


Further Reading


Is the abnormal return following equity issuances anomalous?
www.sciencedirect.com [PDF]
We examine whether a distinct equity issuer underperformance anomaly exists. In a sample of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975 to 1992, we find that underperformance is concentrated primarily in small issuing firms with low book …

Does media attention cause abnormal return?—Evidence from China's stock market <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-XTLL201002015.htm' />Does media attention cause abnormal return?—Evidence from China's stock market [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-XTLL201002015.htm'>PDF]
We examine whether a distinct equity issuer underperformance anomaly exists. In a sample of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975 to 1992, we find that underperformance is concentrated primarily in small issuing firms with low book …

Long-run abnormal return after IPOs and optimistic analysts' forecastsLong-run abnormal return after IPOs and optimistic analysts' forecasts
www.sciencedirect.com [PDF]
We examine whether a distinct equity issuer underperformance anomaly exists. In a sample of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975 to 1992, we find that underperformance is concentrated primarily in small issuing firms with low book …

Post-earnings announcement abnormal return in the Chinese equity marketPost-earnings announcement abnormal return in the Chinese equity market
www.sciencedirect.com [PDF]
We examine whether a distinct equity issuer underperformance anomaly exists. In a sample of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975 to 1992, we find that underperformance is concentrated primarily in small issuing firms with low book …

The price effects of FTSE 100 index revision: what drives the long-term abnormal return reversal?The price effects of FTSE 100 index revision: what drives the long-term abnormal return reversal?
www.tandfonline.com [PDF]
We examine whether a distinct equity issuer underperformance anomaly exists. In a sample of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975 to 1992, we find that underperformance is concentrated primarily in small issuing firms with low book …

Insider trading, abnormal return and preferential information: Supervising through a probabilistic modelInsider trading, abnormal return and preferential information: Supervising through a probabilistic model
www.sciencedirect.com [PDF]
We examine whether a distinct equity issuer underperformance anomaly exists. In a sample of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975 to 1992, we find that underperformance is concentrated primarily in small issuing firms with low book …

Size-related anomalies and stock return seasonality: Further empirical evidenceSize-related anomalies and stock return seasonality: Further empirical evidence
www.sciencedirect.com [PDF]
We examine whether a distinct equity issuer underperformance anomaly exists. In a sample of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975 to 1992, we find that underperformance is concentrated primarily in small issuing firms with low book …



Q&A About Abnormal Return


How do you calculate an abnormal return using CAPM?

You subtract the expected rate of return from the actual rate of return.

What is an abnormal return?

An abnormal return is a term used to describe the returns generated by a given security or portfolio over a period of time that is different from the expected rate of return.

What are some other methods for calculating an abnormal return?

The Arbitrage Pricing Theory (APT) and Real Option Valuation model (ROV) can also be used to determine an asset's or portfolio's abnormality.

What are two ways to calculate an abnormal return?

The CAPM and the Fama-French Three Factor Model can be used to calculate abnormal returns.

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